Management (POEM) of a Company. - Income Tax Department

1 Page 1 Circular No. 06 of 2017 F. No. 142/11/2015-TPL Government of India Ministry of Finance Department of Revenue Central Board of Direct Taxes ** Dated: 24th January, 2017 Subject: Guiding Principles for determination of Place of Effective Management (POEM) of a Company. Section 6(3) of the Income -tax Act, 1961 (the Act), prior to its amendment by the Finance Act, 2015, provided that a company is said to be resident in India in any previous year, if it is an Indian company or if during that year, the control and Management of its affairs is situated wholly in India. This allowed tax avoidance opportunities for companies to artificially escape the residential status under these provisions by shifting insignificant or isolated events related with control and Management outside India.

2 To address these concerns, the existing provisions of section 6(3) of the Act were amended vide Finance Act, 2015, with effect from 1st April, 2016 to provide that a company is said to be resident in India in any previous year, if- (i) it is an Indian company; or (ii) its place of effective Management in that year is in India . 2. "Place of effective Management " is defined in the Act to mean a place where key Management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance, made. 3. The Finance Act, 2016 has changed the effectivity of the said amendment to section 6(3) of the Act. Therefore, the amended provision would now be effective from 1st April 2017 and will apply to Assessment Year 2017-18 and subsequent assessment years.

3 4. 'Place of effective Management ' (POEM) is an internationally recognised test for determination of residence of a company incorporated in a foreign jurisdiction. Most of the tax treaties entered into by India recognises the concept of 'place of effective Management ' for determination of residence of a company as a tie-breaker rule for avoidance of double taxation. The guiding principles to be followed for determination of POEM are enumerated in the following paragraphs. 5. For the purposes of these guidelines, - Page 2 (a) A company shall be said to be engaged in active business outside India if the passive Income is not more than 50% of its total Income ; and (i) less than 50% of its total assets are situated in India; and (ii) less than 50% of total number of employees are situated in India or are resident in India; and (iii) the payroll expenses incurred on such employees is less than 50% of its total payroll expenditure.

4 Explanation: For the aforesaid purpose, - (A) the Income shall be, - (a) as computed for tax purpose in accordance with the laws of the country of incorporation; or (b) as per books of account, where the laws of the country of incorporation does not require such a computation. (B) the value of assets, - (a) In case of an individually depreciable asset, shall be the average of its value for tax purposes in the country of incorporation of the company at the beginning and at end of the previous year; and (b) In case of pool of a fixed assets being treated as a block for depreciation, shall be the average of its value for tax purposes in the country of incorporation of the company at the beginning and at end of the year; (c) In case of any other asset, shall be its value as per books of account.

5 (C) the number of employees shall be the average of the number of employees as at the beginning and at the end of the year and shall include persons, who though not employed directly by the company, perform tasks similar to those performed by the employees; (D) the term pay roll shall include the cost of salaries, wages, bonus and all other employee compensation including related pension and social costs borne by the employer. (b) Head Office of a company would be the place where the company's senior Management and their direct support staff are located or, if they are located at more than one location, the place where they are primarily or predominantly located. A company s head office is not necessarily the same as the place where the majority of its employees work or where its board typically meets; (c) Passive Income of a company shall be aggregate of, - (i) Income from the transactions where both the purchase and sale of goods is from / to its associated enterprises; and (ii) Income by way of royalty, dividend, capital gains, interest or rental Income ; However, any Income by way of interest shall not be considered to be passive Income in case of a company which is engaged in the business Page 3 of banking or is a public financial institution, and its activities are regulated as such under the applicable laws of the country of incorporation.

6 (d) Senior Management in respect of a company means the person or persons who are generally responsible for developing and formulating key strategies and policies for the company and for ensuring or overseeing the execution and implementation of those strategies on a regular and on-going basis. While designation may vary, these persons may include: (i) Managing Director or Chief Executive Officer; (ii) Financial Director or Chief Financial Officer; (iii) Chief Operating Officer; and (iv) The heads of various divisions or departments (for example, Chief Information or Technology Officer, Director for Sales or Marketing). 6. Any determination of the POEM will depend upon the facts and circumstances of a given case. The POEM concept is one of substance over form. It may be noted that an entity may have more than one place of Management , but it can have only one place of effective Management at any point of time.

7 Since residence is to be determined for each year, POEM will also be required to be determined on year to year basis. The process of determination of POEM would be primarily based on the fact as to whether or not the company is engaged in active business outside India. 7. The place of effective Management in case of a company engaged in active business outside India shall be presumed to be outside India if the majority meetings of the board of directors of the company are held outside India. However, if on the basis of facts and circumstances it is established that the Board of directors of the company are standing aside and not exercising their powers of Management and such powers are being exercised by either the holding company or any other person (s) resident in India, then the place of effective Management shall be considered to be in India.

8 For this purpose, merely because the Board of Directors (BOD) follows general and objective principles of global policy of the group laid down by the parent entity which may be in the field of Pay roll functions, Accounting, Human resource (HR) functions, IT infrastructure and network platforms, Supply chain functions, Routine banking operational procedures, and not being specific to any entity or group of entities per se; would not constitute a case of BoD of companies standing aside. For the purpose of determining whether the company is engaged in active business outside India, the average of the data of the previous year and two years prior to that shall be taken into account. In case the company has been in existence for a shorter period, then data of such period shall be considered.

9 Where the accounting year for tax purposes, in accordance with laws of country of incorporation of the company, is different from the previous year, then, data of the accounting year that ends during the relevant previous year and two accounting years preceding it shall be considered. Page 4 8. In cases of companies other than those that are engaged in active business outside India referred to in para 7, the determination of POEM would be a two stage process, namely:- (i) First stage would be identification or ascertaining the person or persons who actually make the key Management and commercial decision for conduct of the company s business as a whole. (ii) Second stage would be determination of place where these decisions are in fact being made. The place where these Management decisions are taken would be more important than the place where such decisions are implemented.

10 For the purpose of determination of POEM it is the substance which would be conclusive rather than the form. Some of the guiding principles which may be taken into account for determining the POEM are as follows: (a) The location where a company s Board regularly meets and makes decisions may be the company s place of effective Management provided, the Board- (i) retains and exercises its authority to govern the company; and (ii) does, in substance, make the key Management and commercial decisions necessary for the conduct of the company s business as a whole. It may be mentioned that mere formal holding of board meetings at a place would by itself not be conclusive for determination of POEM being located at that place. If the key decisions by the directors are in fact being taken in a place other than the place where the formal meetings are held then such other place would be relevant for POEM.